Three years ago, in the December 17 issue of The Coffee Can Portfolio, I predicted:
The left’s great leap forward into authoritarianism will run into a brick wall of reality. A backlash is coming. Knowing the political right, they will somehow snatch defeat from the jaws of victory, but that’s a discussion for another day.
With the November 5 election of Donald J. Trump and the backing of a Republican majority in the House and Senate, that day has arrived. What will a second Trump administration look like? Say what you will about Trump 1.0, he failed to deliver on his promise to “drain the swamp.” Federal government spending—adjusted for population growth and inflation—grew 2.19 percent per year, and that was before the arrival of covid. Tack on the panicked, over-the-top response to covid and real per capita spending grew at a 6.51 percent annualized rate under Trump, more than triple the average rate during 14 presidential terms from 1961 to 2016.
With American politics, at least on substantive economic issues, the status quo is always the base case. While the Democrats tend to push the envelope on bigger government, the historical role of the Republicans has been to consolidate those gains. And yet, from 1961 to 2016 there has been little difference between the two parties as the GOP managed to slightly outspend the Dems.
As the table below shows, the 2020 response to covid under Trump essentially put the economy on a war footing: real per capita spending exploded by 20.62 percent and regulations, as measured by total pages in the Federal Register, grew 19.22 percent. Remarkably, the Biden administration managed to hold on to nearly all the gains, despite technically being credited with perhaps clipping a toenail from the federal Leviathan.
Trump Gets a Mulligan
Investors immediately relegated Trump’s first term to the memory hole and pushed risk assets to all-time highs, with the Nasdaq 100 rallying 8 percent and Bitcoin soaring 45 percent. In a recent bullish cover article, Barron’s gushed:
There is a good chance the S&P 500 will gain far more than Wall Street expects due to the combination of the incoming Trump administration’s deregulation drive and the continued advance of artificial intelligence. Either one on its own would probably be enough to push the market higher. Together, they could act as rocket fuel and send stocks into the stratosphere – up 15% to 25%.
December 16, 2025
Peter Atwater, editor of the Financial Insyghts newsletter and a keen observer of market sentiment, calls this pre-inauguration period the “pre-reality” phase in which “investors embrace abstraction:”
If you look at the variables – lower taxes, less regulation – they are imagining not only each lever that’s going to be pulled, but they’re all going to be pulled simultaneously, and to an extreme degree. The challenge is that markets are pricing in all of that right now.
To be fair, even “talk” of reining in spending and cutting federal red tape represents a notable change; a second Trump administration will almost certainly be an improvement over its predecessor. But with the public debt pegged at $36.1 trillion—up 55 percent since the $2.2 trillion CARES Act was enacted in March, 2020—and long-term interest rates rising in the face of Fed rate cuts, Trump has his hands full.
While government waste is a target-rich environment for Elon Musk and Vivek Ramaswamy, the math simply doesn’t add up. Vincent Cook explains in an excellent article titled, “There is No ‘Efficient’ Government”:
A quick glance at federal expenditure shares confirms that statutorily-mandated benefits account for half of federal expenditures, and constitutionally-mandated interest payments account for another 13 percent of them. Assuming that Trump is not keen on cutting the overall level of military spending either, that leaves just a quarter of annual expenditures—amounting to a little less than $1.7 trillion—as being subject to the Efficiency Commission’s budget ax.
Trump’s nominee for Treasury Secretary, hedge fund billionaire, and George Soros protégé, Scott Bessent, admits to having modest goals on fiscal policy: reduce the budget deficit from 6-7 percent of GDP to 3 percent by 2028, increase military spending and leave entitlements for the next administration.
November 23, 2024
Making matters worse, the newly-hired minions at the Department of Government Efficiency will be toiling without the use of economic calculation. Politicians are guided by votes, not profits. As Ludwig von Mises explained in Bureaucracy,
It is vain to advocate a bureaucratic reform through the appointment of businessmen as heads of various departments. The quality of being an entrepreneur is not inherent in the personality of the entrepreneur; it is inherent in the position which he occupies in the framework of market society. A former entrepreneur who is given charge of a government bureau is in this capacity no longer a businessman but a bureaucrat. His objective can no longer be profit, but compliance with rules and regulations.
November 16, 2024
Trump Takes a Double Bogey on Trade
Heaven help us if Trump pulls the wrong lever. At the top of the detrimental leaderboard is tariffs, apparently his favorite word in the dictionary. Barron’s reports:
Trump has threatened a 60% tariff on imports from China and 25% on goods from Mexico and Canada, and a 10% across-the-board duty on imports from all other countries. If enacted, these would push the US’s effective tariff rate up roughly seven-fold, to 21%, according to Olu Sonola, head of US economic research at Fitch Ratings. That would be the highest level since the 1930s.
Outside of Trump’s inner circle, nearly everyone seems to understand the destructive nature of tariffs, even Keynesian economists and Trump voters. After the election, the stocks of dollar stores immediately sold off on concerns the industry would face higher costs in a trade war with China, no doubt passed on to their lower- and middle-income customers. Investors, at least for now, are downplaying these risks.
The problem is that the very essence of Trump is that of a pragmatic, businesslike interventionist who thinks trade is “negotiable” and “reciprocal.” In a sense, he is right: trade is mutually beneficial, but to the parties involved, its terms are negotiated by the parties involved and each gives up something to get something in return. However, when a third party—in this case, the government—interferes, it can only interject its own wants and needs. It does so through violence (i.e., it gives up nothing and benefits at the expense of those who would otherwise trade with each other). While the state gains power, both parties to the trade are made poorer.
Protectionism prevents a nation’s consumers from securing the best products at the lowest prices around the world. It also denies producers and distributors the cheapest inputs and best deals. Trade and peace go hand-in-hand. A healthy global economy and rising living standards require expanding trade, specialization, and the division of labor. Protectionism moves in the opposite direction, towards self-sufficiency, nationalism, and ultimately impoverishment.
When Trump threatens 100 percent tariffs on anyone who refuses to trade in US dollars, he is playing with fire. In response to the Smoot-Hawley tariff of 1930, global trade plummeted 65 percent, plunging the world into depression and laying the groundwork for nationalism, authoritarianism, and world war.
Teeing Up Ideas
Ideas go through cycles. The nature of bubbles is that bad ideas percolate to the top and are applied with increasing passion. Despite the recent defeat of the left, the “everything bubble” is still with us: financial, imperial, cultural, political, and economic.
I suspect Donald Trump and his contingent of “America Firsters” will be giddy at the chance to apply their solutions to fix what ails America and restore her to former greatness. “MAGA” was always a candid admission of the nation’s decline. Whether or not its adherents possess the tools to arrest that decline is the $36 trillion question.
The Trump 2.0 team has its work cut out. If unsound economic ideas don’t get them, politics and infighting could. Their biggest obstacle, however, is likely to be unrealistically high expectations. Why set the bar at “great?” Staving off bankruptcy would be accomplishment enough.
